Brazil consumer goods

Retail sales and services disappoint in February

April 18th 2018 | Brazil | Retail

Event

According to the national statistics agency, retail sales fell by 0.2% in real terms and services registered a mild 0.1% increase in February (both month on month), negatively surprising market expectations. Year‑on‑year results show a 2.2% contraction in services, but retail sales posted a 1.2% increase.

Analysis

The decline in retail sales in the month (excluding vehicle and construction) came after a 0.8% sequential gain in January and represents the worse monthly result since 2015. With this outturn, retail sales remain 8.5% below their highest level, reached in October 2014 before Brazil's horrendous recession began. However, the year‑on‑year and 12‑month accumulated results indicate a gradual recovery, posting a 1.3% and 2.8% increase respectively.

Services registered a mild increase in February of 0.1% month on month. However, the indicator remains in negative territory both in year‑on‑year terms and on a 12‑month accumulated basis, at -2.2% and -2.4% respectively.

Both results confirm a slowdown in the pace of the economic recovery at the beginning of the year, in line with already‑published data for January‑February showing soft industrial production. Indeed, all three key monthly indicators for February were below market expectations, adding to two negative surprises in January (from industry and services).

Moreover, the negative results of these consumer-led indicators (for retail sales and services) are likely to dampen the strength of this year's overall economic upturn. Firstly, this is because of the heavy weighting of services in Brazil's GDP (over 70%), meaning that weakness in that sector constrains overall performance. Secondly, the latest readings indicate that consumers are still reluctant to increase spending by much, despite a long monetary‑easing cycle along with lower inflation and unemployment. This suggests that household indebtedness remains problematic and confidence about the jobs outlook is tepid.

Credit demand has barely responded to sharp cuts in the policy rate, partly because commercial bank lending rates remain high. This has renewed the debate about Brazil's highly concentrated banking sector (the four largest banks—two private and two public—account for 79% of total loans) and the resulting lack of competition. The central bank is trying to lower lending rates through some microeconomic measures, including limiting installment payments and making the use of personal credit scores mandatory.

Impact on the forecast

Our GDP growth forecast for 2018 remains unchanged (2.8%), but the latest data indicate that the balance of risks is tilted to the downside.